If you are an employer, then your employees and contractors are almost certainly using generative artificial intelligence (AI)-powered tools in the course of their work. An August 2023 McKinsey study found that 27% of employees born in 1981 or later were using AI regularly for work – a percentage that will only have increased since the study's publication.
Areas poised for significant adoption of (and disruption by) AI tools include media and entertainment, marketing and advertising, design, coding and engineering, graphic design, architecture, video games, and publishing, among countless others. The media, entertainment, video game, and marketing industries in particular face significant disruption as new tools and workflows allow financiers to cut costs, and the use of "digital replicas" in theory creates new avenues for talent to monetize their name and likeness and creative works.
Unfortunately, due to the nascent status of lawmaking around the use of AI, those employees and contractors are also probably exposing you to potential liability and accompanying financial and reputational harm. Issues arising from use of AI tools could include:
- Copyright and trademark infringement claims
- Privacy-related claims
- Claims related to right of publicity
- Breach of contract and other claims relating to unauthorized disclosure of confidential information
- Claims related to data breaches and hacks
- Violations of forthcoming AI-specific legislation (for example, the No AI Fraud Act, if adopted).
While there remains some dissent as to just how quickly AI will disrupt traditional industries, there is consensus around one thing: The approaching tsunami of lawsuits arising from the use of artificial intelligence. Such suits will require intense scrutiny of contracts (particularly relating to representations and warranties, indemnification, and insurance provisions), website and app terms and conditions, and emerging new state and federal legislation as parties struggle to allocate liability for AI-related losses.
For example, imagine a claim brought against a company that arises out of the infringing activity of the employee of an independent contractor vendor. The MSA between the company and vendor may not have any express guidelines or provisions relating to the use or permissibility of AI tools by the vendor. The vendor may not have even been aware that its employees were using AI. The particular use may or may not have been permitted by the terms and conditions of the AI tool at issue. In summation: a Gordian knot of obligations and potential liabilities, with a lot of (expensive) questions to be answered in a litigation. Alternatively, consider the scenario of an actor's detailed digital replica being leaked to the internet via the data breach of a vendor, and subsequently misused for commercial or nefarious purposes. The damages to the actor could be significant – but who bears responsibility for those damages?
Adding to this is chilling prospect that most companies in the United States may not have contemplated: AI-related claims may not be covered by their current insurance policies.
Most of the current AI discussion around insurance involves how carriers are using the latest technologies to enhance their underwriting and claims handling functions. But there is very little information concerning the two most important issues for policyholders:
- Whether it is possible to purchase specialized policies to cover AI-related losses.
- Whether such losses can be covered by existing policies.
As of this writing, "off-the-shelf" AI policies are not widely available. We are closely monitoring the insurance industry's approach to this niche coverage and will provide updates via future client alerts. In the meantime, the second question is of the utmost importance – and policyholders must take immediate action.
Some of the most common policies on the market today could cover AI-related losses. To determine if yours do, you must: (i) accurately identify the AI risks you face; and (ii) analyze your policies with an eye toward those risks. Now is the time to undertake those two tasks – because once a loss occurs, it will be too late to make any coverage adjustments.
It is equally important for policyholders to keep AI top-of-mind when purchasing or renewing their next round of coverage. Simply put: When insurance carriers can sell a policy that covers a specific risk, they seek to exclude that risk from all other policies. Such is the case with AI-related losses.
As AI-based claims inevitably mount, and insurers work toward offering dedicated policies, the industry will endeavor to eliminate AI coverage from all other insurance contracts. This change could take the form of new, or newly modified, exclusions. But it could also be achieved more subtly.
By way of example, it is not uncommon for carriers to incorporate a policyholder's insurance application into the resulting policy. When this is done, and a loss ensues, the issuing carrier often attempts to find "misrepresentations" in the application as a basis for denying coverage – or worse, voiding the policy altogether. Policyholders must remain vigilant when describing their use of AI in a policy application, because even the slightest mischaracterization could result in a long and costly coverage dispute.
In sum, the potential liability and legal risk for companies from use of AI tools is a clear and present danger, and it is imperative that they act now. There are several best practices that all companies should engage in immediately:
- Develop a clear understanding of how AI impacts your business.
- Engage counsel to assist in mitigating AI-related risks, creating internal AI policies, and conforming existing business contracts to minimize AI-associated losses.
- Engage insurance counsel to audit existing insurance policies and advise on future policy purchases and renewals.
This is a rapidly developing and complex area of the law – and one that is guaranteed to affect your business operations. But the good news is that you don't have to go it alone.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
